CALGARY – Imperial Oil Ltd.’s top executive admitted Friday that the company’s recent performance was “not our best,” after a quarter where operating costs rose and profit fell despite surging oil prices.
“We can do better,” Imperial president and CEO Rich Kruger said Friday after releasing limited first quarter financial and operating results that fell short of analysts’ expectations.
Financial woes aside, Imperial was also forced to defend itself on multiple fronts at its annual general meeting on the same day. A shareholder motion by the British Columbia Investment Management Corp. to adopt say-on-pay vote giving shareholders the chance to have a say on executive salaries was defeated by Imperial’s major shareholder, Exxon Mobil Corp.
Excluding Exxon Mobil’s shares from the vote, the company’s minority shareholders voted 64 per cent in support of the motion.
“When we have a minority vote like that, we will look at that over the coming years,” Kruger said, though he would not promise to implement a non-binding vote on executive compensation.
The company’s executives also had to explain why Imperial’s operating costs increased during the first quarter.
The company’s net earnings fell 43 per cent in the first quarter to $293 million, compared with $516 million a year earlier. Imperial plans to release cost details and other indicators next week.
The company blamed higher operating costs on extremely cold weather during the month of February. Speaking to reporters, Kruger said the weather was 10 degrees colder than the 10-year average at both the company’s Cold Lake and Kearl oilsands projects, forcing the company to stop work during the cold snaps.
In addition, Alberta government’s curtailment order, effectively a production quota, raised costs for the company, Kruger said.
“The Government of Alberta’s production curtailment order significantly affected financial performance, as improved upstream realizations were more than offset by reduced downstream margins,” Kruger said in a statement.
The curtailment order, imposed by the Alberta government when discounts for heavy oil reached record-setting levels at the end of 2018, cost the company about $250 million in the first quarter due to higher prices in the company’s refinery business, Kruger said.
In a research note, Raymond James analyst Chris Cox called Imperial’s upstream costs “a drag on the financial results – at least from what we can see with Imperial’s limited disclosure.”
The Imperial CEO has been a vocal opponent of the curtailment order in Alberta and believes it has not solved the underlying issue of clearing a glut of oil in the province out. Oil storage tanks are now back at the same levels as they were in late Nov. 2018 when discounts for domestic crude reached US$50 per barrel, he said.
“The tanks are full again,” Kruger said. “We’re right back now to where we were four months ago.”
Imperial resumed shipping oil on railway cars in March, when it moved roughly 25,000 barrels per day, but Kruger said the economics still don’t support ramping up more volumes, noting that he intends to talk to incoming Alberta Premier Jason Kenney about measures that would improve rail economics.
Husky Energy CEO Rob Peabody echoed that sentiment, adding that higher local crude prices have come at the cost of oilfield service industry layoffs, poorer rail shipping economics and “unprecedented uncertainty” among investors.
“Industry is shutting in barrels that would otherwise have been economic. This has provoked job losses and resulted in economic hardship for the service sector, which will ultimately reduce the tax base,” Peabody said. “Whether higher royalties on a diminished production base offset the broader social costs is an open question.”
Despite Husky’s misgivings, the company earned $328 million in its latest quarter, up from $248 million a year ago. Profit stood at 32 cents per share for the three months ended March 31 compared with a profit of 24 cents per share a year earlier.
Husky slipped 0.14 per cent to $14.40. Imperial shares traded close down nearly two per cent to $39.19 per share, despite a 16 per cent dividend hike to $0.22 per share.
In addition to questions about costs and executive compensation, Imperial also had to explain a safety incident at its refinery in Sarnia, Ont.
On April 2, a 150-foot tower at the refinery in Sarnia collapsed while the company was preparing to do maintenance work at the facility. There were no spills or injuries but the accident was an unwelcome event for Imperial, which prides itself on its safety record.
“We don’t take that lightly at all. It is a big disappointment,” Kruger said, adding that the investigation into what caused the tower to collapse is ongoing and further details would be released later.
With files from The Canadian Press